Monday 28 April 2008 19.04 EDT
First published on Monday 28 April 2008 19.04 EDT

Leisure conglomerate Whitbread has announced a five-year expansion plan for its Premier Inn budget hotel business and Costa coffee shop chain, which will create an estimated 21,000 jobs in Britain.

It is to double the size of its Costa chain, to 2,000 stores, and has promised investors the division will finally start to become "an important driver of profits" for the group, which includes Beefeater and Brewers Fayre pub restaurants.

Last month, Costa opened its 1,000th site, located in Moscow's Pushkin Square. It is one of about 30 shops opened through joint ventures in Russia and China. A further 270 overseas sites are operated by franchisees. Of the core 700 UK shops, 80% are operated directly by Whitbread and the rest by franchisees.

By 2013, Whitbread expects half of Costa stores to be located outside Britain.

Despite the scale of Costa's operations, its profit contributions and growth have been eclipsed in recent years by those of Premier Inn, which generated 77% of Whitbread's underlying operating profit for the year to February 28.

Yesterday, the leisure combine said its Costa division had shown growth in operating profit of 17%, to £20.8m, over the same period - only 9% of the group total. Chief executive Alan Parker said the unit had reached critical mass and "will be an important driver of the group's profit growth in the future".

Whitbread has repeatedly dismissed suggestions the UK coffee shop market is close to saturation, insisting there remains "scope to grow the brand significantly". Areas to be targeted include parts of central London and several big towns, shopping centres, supermarket concessions and motorway service stations where Costa is under-represented.

Also over the next five years, Parker said he planned to increase the size of Premier Inn - already the largest hotel chain in Britain with 36,000 rooms - by 50%. Last year, Whitbread added 3,400 rooms to its estate, beating a target of 3,000.

Parker said he was signing up a stream of corporate clients as cost pressures in the wider economy prompted many businesses to make savings on travel expenses. He said firms could save between 25% and 35% by switching from four-star hotel accounts to Premier Inn. The average room price at Premier is £50 a night.

Asked about recent aborted takeover discussions with rival chain Travelodge, Parker said: "We have made no secret of the fact there is an industrial logic to such a deal. Whitbread has looked at buying Travelodge on three occasions in the past .... [On this occasion] our valuation was a long way short of the asking price, which was £900m."

With lower than expected debt, Parker hinted he was scouting around for acquisition opportunities but would consider share buybacks if none arose. "People who are still valuing their businesses at [earnings] multiples of two years ago are not going to be able to do much."

Whitbread's comparable sales for the year to the end of February rose 5.7%, with a strong recovery at its pub restaurants arm. Operating profits reached £230m.

"The company should continue to outperform most other leisure companies over the medium term due to its low gearing and ability to drive Premier Inn and Costa expansion/like-for-like sales and remove pub restaurant costs," said Panmure analyst Douglas Jack.